Presenting loans from directors and shareholders
How to classify and disclose loans to or from directors and shareholders in a small company's statements, and the terms to get from the client in writing.
By Achekam · · 4 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
In an owner-managed company, the director's loan account is where the owner's personal and business finances meet. Salary not drawn, personal expenses paid by the company, cash put in to cover a bad month: it all lands in one account, often with no agreement, no interest and no repayment date. It is also one of the balances most often presented wrongly in small-company statements.
This article covers why these loans are so often misclassified, how the terms drive classification, how to get those terms, how to present the loans so they stand out, and what the related-party note must say.
Why owner loans are so often misclassified
Three habits cause most of the problems:
- Netting. A loan to the director and a loan from the director, or loans with two different shareholders, are offset into one figure. Offsetting is allowed only where there is a legal right and an intention to settle net, and most owner loans do not meet that test.
- Defaulting to non-current. Loans from owners are shown as non-current because "they won't be called", even though nothing stops the owner asking for repayment tomorrow.
- Hiding in other lines. A loan to a director sits in trade and other receivables; a loan from a shareholder sits in trade and other payables. Readers miss both.
Each of these can mislead a lender or a buyer of the business, and each can carry tax consequences the preparer should flag, even though the statements are not the place to resolve them.
Current or non-current: what the loan terms say
Classification follows the terms, not the intentions. A liability is current if the company does not have the right, at the reporting date, to defer settlement for at least twelve months after that date. A loan repayable on demand is current, however unlikely the demand.
That leaves three common situations:
- No written terms. The loan is effectively repayable on demand, so present it as current.
- Written terms with repayment more than twelve months away, and no right for the lender to call it earlier. Non-current, with any instalments due within twelve months shown as current.
- A subordination or deferral agreement under which the owner agrees not to claim repayment while the company's liabilities exceed its assets, or for a stated period. That often supports non-current classification for the period it covers, and it matters for going concern too.
Measurement follows the financial instruments requirements of the client's framework. An interest-free or below-market loan raises measurement questions under full IFRS; the IFRS Foundation's summary of IFRS 9 explains how financial assets and financial liabilities are recognised, classified and measured. IFRS for SMEs deals with basic financial instruments in its own section, with simpler requirements for loans repayable on demand.
Getting the terms from the client in writing
A preparer cannot classify a loan without its terms, and the ledger will not supply them. Ask the client, in writing, for each loan to or from a director, shareholder or member:
- the year-end balance, agreed with the person concerned;
- whether there is a written agreement, and a copy if there is;
- the interest rate, if any;
- repayment terms, or confirmation that there are none;
- any security given or subordination agreed;
- unusual movements in the year, such as amounts written off or converted to shares.
In Achekam, staff can send this as a request from the RFI console and track the answers there. A signed confirmation from each director of their own balance is worth asking for even where the statements are not audited.
Separate statement lines that still total correctly
Owner loans deserve their own lines. "Loan to director" and "Loan from shareholder" are clearer than burying either among trade balances, and they make the related-party note easier to follow.
In Achekam, a firm can add its own statement lines and groups and reword any row title, and later builds keep those choices. Each custom line still totals into a standard line, so a separate "Loans from shareholders" line under non-current liabilities, with the current portion under current liabilities, keeps the notes and the cash flow consistent. Map each loan account deliberately. Achekam suggests a line for every trial balance account, but nothing becomes an approved mapping until a person approves it, and owner loans are exactly where a suggestion based on an account name can go wrong. The mechanics are in adding your own statement lines and wording.
Once the lines are in place, run the automated review of the draft. It lists findings for a person to accept, resolve or dismiss and is advice only, so it supplements, rather than replaces, the reviewer's own check that each loan sits on the right side and in the right category.
Related party and terms disclosure
Directors and shareholders with control or significant influence are related parties, so their loans are related-party balances. The note should give the nature of the relationship, the balances at year end, the terms and conditions, including whether the loans are secured and how they will be settled, and details of any sureties given or received. Achekam's notes take their figures from the mapped trial balance; terms the trial balance does not hold appear as "[to be completed]" until someone supplies them.
Company law may add requirements of its own, particularly for loans and financial assistance to directors, so check the Act for the client's country. The wider related-party disclosure is covered in gathering related party disclosures from the client.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
